The Problem With Profitless Start-ups

Yesterday, I ordered lunch from a gourmet meal-delivery start-up called SpoonRocket – a takeout container of sirloin au poivre and roasted cauliflower that was shuttled to my door in exactly 11 minutes, costing me $8. I then took an UberX car to a meeting across town, paying roughly $10 for a 15-minute ride. On my way, I pulled out my phone to see about getting my broken dryer fixed through Handybook, which provides on-demand repairs in the Bay Area for less than a local handyman wouldcharge.

There are dozens more services like these operating in and around San Francisco – Homejoy for cleaning, BloomThat for flowers, Postmates for courier service, and on and on. Most of them provide cheap, convenient amenities at the tap of a smartphone app. Few of them are profitable on a corporate level. And together, they’ve formed the backbone of a strange urban economy: one in which massive venture-capital injections allow money-losing start-ups to flourish, while providing services that no traditional, unsubsidized business can match. It’s an economy built on patience, and the hope that someday, after the land grab is over and the dust has settled, a better business model willemerge.

It’s hard to know which of today’s new start-ups are unprofitable. But in some cases, losing money is kind of the point. I have no inside information on SpoonRocket’s financials, for example, but I imagine that the company books a loss of a few cents every time I click the order button. (There’s just no way, short of a supply-chain miracle, that my $8 covers the cost of preparing a gourmet lunch, driving it to my house, and paying all the drivers and cooks and engineers and assorted other costs associated with running their business.) But SpoonRocket doesn’t have to make money, because it’s just raised $10 million in venture capital expressly so it can keep its prices low. The metric its investors care about right now is user growth, not profits. And if, indeed, the company is selling meals for less than they cost to make, those investors are willing to fill thegap.

This business model is great for consumers. As a result of start-ups’ willingness to lose money for months or years at a time, I get cheap, fast services that come with an effective subsidy that can add up to thousands of dollars a year. But they’re problematic for the businesses themselves. Unlike Amazon or Google (which have profitable core operations that subsidize the money-losing services elsewhere in their business), or Uber (which uses the profits from its high-margin Uber Black and Uber SUV lines to subsidize its low-margin UberX service), many of today’s start-ups have no profitable parent company pouring in money. They’re simply taking millions of dollars in venture capital with the hope of keeping prices low, pushing rivals out of the market, and eventually finding a way to turn a profit.

There are several worrying things about this new, profitless-on-purpose way of doing business. First is that the while some of the money used to fund money-losing start-ups comes from rich Silicon Valley investors, some large amount of it comes from public pensions, college endowments, and other, more modest sources. Lyft backer Andreessen Horowitz, for example, has gotten investments from the Imperial County, California, Employee Retirement System and the University of Michigan; the Tennessee Consolidated Retirement System invests money with SpoonRocket backer General Catalyst. If you asked them, I’m sure that firefighters in Memphis and public schoolteachers in El Centro would have no idea that their retirement funds are being used to lower the price of my delivery lunches and rides across town. But that’s exactly what’s happening. And when these venture-backed price wars happen in dozens of high-end service sectors all at once, you have a strange cultural phenomenon in which Main Street dollars are being used to finance the lifestyles of cosmopolitanyuppies.

The second issue with the venture-backed service economy is the Amazon problem – specifically, the practice of selling goods at or near a loss creates a deeply unfair competitive terrain for regular businesses. A start-up can sell a $10 lunch for $8 because it has money in the bank and investors who will rush in with more when the supply runs low. But if my local sandwich shop tries to do the same thing, it won’t make next month’s rent. The same goes with non-retail service businesses. Taxi companies had a decent chance of competing with UberX in its early days. But now that UberX and Lyft are both slashing prices to the bone with the assistance of millions of dollars in venture capital, the fight simply isn’tfair.

In the context of international trade, this kind of predatory pricing (selling goods at or below cost in order to drive out rivals) is often illegal. There’s a reason why it should trouble us domestically, too – trying to compete in the VC-backed economy as a profit-conscious business is like running a triathlon with ankle weights.

The third problem is that, as companies like Kozmo and Webvan learned in the first dot-com crash, the music stops eventually. At some point, investor patience wears thin, and the businesses that are still losing money on a per-unit basis tend to shrivel and die. When that happens, what’s left? A hole in the local economy where the local sandwich shop used to be, and nothing to fill the void. Given enough time and enough venture-backed land grabs, we could end up with an oddly configured service sector that contains a fraction of the jobs and utility it did before the subsidized prospectors moved in.

Cushions for emerging business models aren’t all bad – not every company should be forced to make a pretty P&L right out of the gate, and without patient investors and other forms of subsidy, we wouldn’t have companies like Twitter or Amazon, or things like electric cars and solar panels. And, as I said, the venture-backed economy is amazing for the people who live in it. In the history of the world, there’s never been a better time to be a consumer in San Francisco or New York than today, what with our cornucopia of cheap, on-demand services. I would miss my cut-rate sirloin and cheap Ubers to the airport if a regulatory authority or a market crash took them away.

But you can see how, on a grand scale, the existing model could become problematic. The only way the loss-making venture-backed economy can keep chugging along is if there is a constant supply of new money coming in at ever-higher valuations, subsidizing low prices and making earlier investors whole. Eventually, as in Amazon’s case, the public markets may have to bear some of the subsidy. It’s a kind of benevolent Ponzi scheme, one that results in a lot of very cool services being provided at or below cost to a select group of urban consumers, and a lot of traditional businesses being forced to paddle hard to stay afloat. The profitless start-up model should worry us about the future of commerce and competition, even as we take advantage of itsgifts.

As we anticipate the end of Mueller, signs of a wind-down:-SCO prosecutors bringing family into the office for visits-Staff carrying out boxes-Manafort sentenced, top prosecutor leaving-office of 16 attys down to 10-DC US Atty stepping up in cases-grand jury not seen in 2mo

For Boeing and other aircraft manufacturers, the practice of charging to upgrade a standard plane can be lucrative. Top airlines around the world must pay handsomely to have the jets they order fitted with customized add-ons.

Sometimes these optional features involve aesthetics or comfort, like premium seating, fancy lighting or extra bathrooms. But other features involve communication, navigation or safety systems, and are more fundamental to the plane’s operations.

Many airlines, especially low-cost carriers like Indonesia’s Lion Air, have opted not to buy them — and regulators don’t require them. Now, in the wake of the two deadly crashes involving the same jet model, Boeing will make one of those safety features standard as part of a fix to get the planes in the air again.

… Boeing’s optional safety features, in part, could have helped the pilots detect any erroneous readings. One of the optional upgrades, the angle of attack indicator, displays the readings of the two sensors. The other, called a disagree light, is activated if those sensors are at odds with one another.

Boeing will soon update the MCAS software, and will also make the disagree light standard on all new 737 Max planes, according to a person familiar with the changes, who spoke on condition of anonymity because they have not been made public. The angle of attack indicator will remain an option that airlines can buy.

Attorneys for New England Patriots owner Robert Kraft and more than a dozen other defendants charged in a Florida prostitution sting filed a motion to stop the public release of surveillance videos and other evidence taken by police.

Attorneys filed the motion Wednesday in Palm Beach County court. The State of Florida does not agree with the request, according to the filing.

In the motion, the attorneys asked the court to grant a protective order to safeguard the confidentiality of the materials seized from the Orchids of Asia Day Spa in Jupiter, and “in particular the videos, until further order of the court.”

Two years in, White House aides are dismayed to discover the president likes lobbing pointless, nasty attacks at people like George Conway and John McCain

But the saga has left even White House aides accustomed to a president who bucks convention feeling uncomfortable. While the controversies may have pushed aside some bad news, they also trampled on Trump’s Wednesday visit to an army tank manufacturing plant in swing state Ohio.

“For the most part, most people internally don’t want to touch this with a 10-foot pole,” said one former senior White House official. A current senior White House official said White House aides are making an effort “not to discuss it in polite company.” Another current White House official bemoaned the tawdry distraction. “It does not appear to be a great use of our time to talk about George Conway or dead John McCain. … Why are we doing this?

When Mr. Trump was running for president, he promised to personally stop American companies from shutting down factories and moving plants abroad, warning that he would punish them with public backlash and higher taxes. Many companies scrambled to respond to his Twitter attacks, announcing jobs and investments in the United States — several of which never materialized.

But despite Mr. Trump’s efforts to compel companies to build and hire, they appear to be increasingly prioritizing their balance sheets over political backlash.

“I don’t think there’s as much fear,” said Gene Grabowski, who specializes in crisis communications for the public relations firm Kglobal. “At first it was a shock to the system, but now we’ve all adjusted. We take it in stride, and I think that’s what the business community is doing.”

There’s no specific stipulation that Milo must be heard, so it could be worse

President Trump is expected to issue an executive order Thursday directing federal agencies to tie research and education grants made to colleges and universities to more aggressive enforcement of the First Amendment, according to a draft of the order viewed by The Wall Street Journal.

The order instructs agencies including the Departments of Education, Health and Human Services and Defense to ensure that public educational institutions comply with the First Amendment, and that private institutions live up to their own stated free-speech standards.

The order falls short of what some university officials feared would be more sweeping or specific measures; it doesn’t prescribe any specific penalty that would result in schools losing research or other education grants as a result of specific policies.

Tech companies say that it is easier to identify content related to known foreign terrorist organizations such as ISIS and Al Qaeda because of information-sharing with law enforcement and industry-wide efforts, such as the Global Internet Forum to Counter Terrorism, a group formed by YouTube, Facebook, Microsoft, and Twitter in 2017.

On Monday, for example, YouTube said on its Twitter account that it was harder for the company to stop the video of the shootings in Christchurch than to remove copyrighted content or ISIS-related content because YouTube’s tools for content moderation rely on “reference files to work effectively.” Movie studios and record labels provide reference files in advance and, “many violent extremist groups, like ISIS, use common footage and imagery,” YouTube wrote.

The cycle is self-reinforcing: The companies collect more data on what ISIS content looks like based on law enforcement’s myopic and under-inclusive views, and then this skewed data is fed to surveillance systems, Bloch-Wehba says. Meanwhile, consumers don’t have enough visibility in the process to know whether these tools are proportionate to the threat, whether they filter too much content, or whether they discriminate against certain groups, she says.

Two mystery litigants citing privacy concerns are making a last-ditch bid to keep secret some details in a lawsuit stemming from wealthy financier Jeffrey Epstein’s history of paying underage girls for sex.

Just prior to a court-imposed deadline Tuesday, two anonymous individuals surfaced to object to the unsealing of a key lower-court ruling in the case, as well as various submissions by the parties.

Both people filed their complaints in the New York-based 2nd Circuit Court of Appeals, which is overseeing the case. The two people said they could face unwarranted speculation and embarrassment if the court makes public records from the suit, in which Virginia Giuffre, an alleged Epstein victim, accused longtime Epstein friend Ghislaine Maxwell of engaging in sex trafficking by facilitating his sexual encounters with teenage girls. Maxwell has denied the charges.

Rescue teams in Mozambique are struggling to reach the thousands of people stranded on roofs and in trees and urgently need more helicopters and boats as post-cyclone flood waters continue to rise.

Rescue workers, military personnel and volunteers are rushing to save thousands of Mozambicans before flood levels rise further, but with four helicopters, a handful of boats and extremely difficult conditions, have only been able to save about 413 so far.

“I don’t even know if we’ve made a dent. There are just so many people. The scale is huge. We’re busy doing the best we can,” said Travis Trower from Rescue South Africa, adding that a lot of people had been washed away but those still alive, whom he had seen from helicopter flights, were in a very bad state.

More than 400 sq kilometres (150 sq miles) in the region are flooded, according to satellite images taken by the EU, and in some places the water is six metres (19ft) deep. At least 600,000 people are affected, according to the UN Office for the Coordination of Humanitarian Affairs (OCHA), ranging from those whose lives are in immediate danger to those who need other kinds of aid.

About 40 percent of the District’s lower-income neighborhoods experienced gentrification between 2000 and 2013, giving the city the greatest “intensity of gentrification” of any in the country, according to a studyreleased Tuesday by the National Community Reinvestment Coalition.

The District also saw the most African American residents — more than 20,000 — displaced from their neighborhoods during that time, mostly by affluent, white newcomers, researchers said. The District and Philadelphia were most “notable” for displacements of black residents, while Denver and Austin had the most Hispanic residents move. Nationwide, nearly 111,000 African Americans and more than 24,000 Hispanics moved out of gentrifying neighborhoods, the study found.

In an essay accompanying the study, Sabiyha Prince of Empower DC said the city “rolled out the proverbial red carpet” for tens of thousands of new residents in the past five years. But the new dog parks, bike lanes, condominiums and pricey restaurants that followed, she said, are not viewed as improvements by long-term residents, who can feel isolated because of losing neighbors, social networks and local businesses. Prince, an anthropologist, said longtime Washingtonians tell stories of “alienation and vulnerability in the nation’s capital.”